Strategic Management: Focus on Louis Vuitton - Research Paper Example

 Introduction In the study of business organizations and strategic management, there is probably no undertaking more replete with paradoxical undercurrents than that of the luxury retail industry. The concept of luxury is a throwback to the days of the aristocracy and the separation of the classes, itself an anachronism the vestiges of which nevertheless exists today in the brand names Rolls Royce, Prada, Armani, Gucci, Burberry, Richemont, Mercedes Benz, and Louis Vuitton, among others. Of these brands, it is probably the Louis Vuitton name that has penetrated nearly all major product classes in the consumer retail industry, and successfully launched itself on a global scale while maintaining its exclusivist image. In this paper, the business of Louis Vuitton Moët Hennessy (LVMH) Group will provide a context for the application of strategy paradox theory. However, before a discussion of the application of organizational paradoxes may be embarked upon, it is useful to gain some familiarity with the theory of the strategy paradox. The strategy paradox In a paradox, two apparently contradictory ideas are held to work simultaneously (Storey & Salaman, 2010). In a strategy paradox, the divergence in strategic contexts faces the company as an inescapable dilemma – that is, the nature of the business in question calls for the strategic planners to reconcile two contradictory requisites in order for the business to succeed. There are several paradoxes that, over time, have been observed and articulated by various theorists. In the examination of these so-called paradoxes, however, it is useful to keep in mind the observation of Harmer & Abbott (2002) that these theories are not pure or true paradoxes, but are only counterintuitive. The apparent contradictions are not truly so, and upon rationalization are shown to be reconcilable. Mintzberg’s paradox of deliberateness and emergence. Vieira da Cunha, Clegg, and Pina e Cunha (2002) cited Mintzberg & Waters (1982) and Mintzberg & McHugh (1985) as seminal works articulating the close linkage between deliberate and emergent strategy. The paradox of deliberateness and emergence states that “realised strategies are not always intended” but rather fall within “the continuum of deliberate and emergent strategies” (Ehnert, 2009:45). De Wit and Meyer’s paradoxes are several and distinct, and lucidly articulated in their book Strategy Synthesis: Resolving Strategy Paradoxes to Create Competitive Advantages (2005). In this seminal work, Mintzberg’s paradox of deliberate strategizing and strategy emergence is dissected and resolved into apparently component parts highlighting various aspects of the deliberateness-emergence continuum, namely: (1) the paradox between logic and creativity; (2) the paradox of balancing revolutionary and evolutionary change processes; (3) the paradox between leveraging resources and market adaptation; (4) the paradox of profitability and responsibility; and (5) the paradox of control versus letting go. The Whittington-Khanna/Palepu debate. This is an ongoing debate on the viability of organizational forms. Whittington (1999) takes the stand that based on empirical evidence, holding companies in developed countries are giving way to smaller organizations with more focused divisional strategies. On the other hand, Khanna and Palepu (1999) espouse the contrary, that in developing countries business enterprises are consolidating into more efficient groups. (Pettigrew, Thomas and Whittington, 2002:273). Weber’s Paradox of unintended consequences. Under this paradox, human intent and agency is often subverted by the law of unintended consequences. Argument: the external world is inherently a highly complex phenomenon or set of phenomena and is ultimately incomprehensible in any complete sense (Storey & Salaman, 2010). It is the paradoxical relation of man and fate, that man is a uniquely rational being, and yet is rendered subject to the self defeating nature of his own rational action (Hamilton, 2004). There are four elements to this paradox of reason, which Weber identifies as the paradox of materialism (that materialism does not exist in its pure form but is imbued with aesthetic, religious or ethical meaning, defying the economic concept of good); of magical action (as evident in ritualization within culture that defies rationalization); of asceticism (the search for otherworldly ends through wordly means); and of formal rationality (as evident in the formalization of law, of organizational action, and the development of capitalism, against substantive rationality; that contradiction exists between the formal and the substantive). Reynor’s strategy paradox encompasses the concept that strategies having the greatest chances of success also have the greatest chances of failure, because of the great unknowns that permeate the organization’s environment (Moyer, 2008). When environmental circumstances favor the strategy adopted, such as differentiation or cost leadership, may fail if key uncertainties (such as market conditions) in the environment work against the strategy planner’s expectations (Daft, 2009, p. 71). Parrondo’s paradox dwells on gaming strategy. It states that, given two games, each with a higher probability of losing than winning, it is possible to construct a winning strategy by playing the games alternately. The theory is founded on mathematical probabilities and Markov chains (Crisan, Nechita and Talmaciu, 2007) , and while it is unlike the other paradox theories because it is less grounded on philosophical discourse, the theory still presents a useful insight of paradox useful in organizational strategy. Beaudan’s implementation paradox (2001). Although the strategy planned is flawless, lacking a clear process to make the framework matter at the time it is most needed, that is, when it is challenged, the strategy is doomed to failure. In short, the strategy is a mere framework, and upon its implementation there is a constant need to re-evaluate the activities planned and to constantly revise and fine-tune when the strategies are actualized. Chen’s paradoxical integration (the Chinese “Middle Way” perspective). This addresses the paradox of the dominant Western thought, that is strong in characterization and analysis, and the Chinese philosophy that is integrative and encompassing (Chen, 2002). Chen’s solution is typically Chinese, that is, to find the Middle Way, a paradoxical integration that views the two opposites as complementing parts of a single totality and thus interdependent in nature. History of the company The LVMH Group’s contemporary existence began in 1987 when the two companies Moët Hennessy and Louis Vuitton merged; however, the roots and traditions of this Group extends far back into eighteenth century Champagne, with Claude Moët who carried on the work of Louis XIV contemporary Dom Perignon, and the nineteenth century Parisian craftsman Louis Vuitton who invented the modern luggage. Today, the LVMH Group is known worldwide as the leading global luxury goods manufacturer distinguished by “creative passion with a cosmopo-litan flair and a spirit of conquest” (LVMH RD, 2009, p. 1). The Group’s organizational chart is presented in the Appendix, to provide an idea of its scope of operations. It may be gleaned from the chart that the company’s various businesses include prestigious name brands in wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewelry, and other activities such as media and publications related to fashion and the arts. To better appreciate the specific paradoxes that apply to Louis Vuitton, a brief description of its recent performance is helpful at this point. The Group realized a total revenue of €17.1 billion for 2009, and employs some 77,000 individuals worldwide. It boasts of a unique portfolio carrying some 60 highly prestigious brands and an international retail network comprised of more than 2,400 stores globally. Remarkably, both revenues and profits continued to rise through the global economic crisis, consistently from 2005 to 2009; its financial health is unquestionable, with net financial debt receding and free cash flow rising within the same five-year period. It earns its greatest revenue from fashion and leather goods (37%), selective retailing and other activities (26%), equally from wines and spirits and from perfumes and cosmetics (16% each), and least from watches and jewelry (5%). Geographically, revenue breakdown shows the most lucrative market in the United States (23%) and Asia excluding Japan (23%), followed by Europe (21%), France (14%), Japan (10%), and the rest of the world (9%). LVMH Group, hereafter referred to as Louis Vuitton, maintains its contemporary image of the quintessential purveyor of luxury of European monarchs and other royalty. Among its key strategies are: (1) its presence in all luxury sectors – the only group to be so positioned; (2) its favourable geographic balance of revenue; (3) the strength of its several stellar brands; (4) its solid financial structure; and (5) the commitment to quality and creativity of its teams (LVMH.com, 2011). Because of this, the company meets challenges that are uniquely poised against luxury companies, the main challenge among which lies in the preservation of the value of the luxury brand. Berthon, et al. (2009) describes three constituent value dimensions that pertain to the luxury product: the functional, the experiential, and the symbolic values. Of these, the most important to the luxury customer is the symbolic value. The following diagram depicts this paradigm. Source: Berthon, Pitt, Parent and Berthon, 2009, p. 49 The successful luxury brand offers status, especially to the nouveaux riches. These goods must be tangible, so that they are readily evident to others, and therefore ascribe to their owners a level of elitism. The good is not necessarily, and preferably not, consumable, or even functionally utilized, because the idea is to be seen as possessing the items for the prestige they convey to their owners. For instance, small leather goods which carry the Vuitton label send not-so-subtle visual signals that their owners spent thousands of dollars on a small bag, thereby enhancing their desirability to those who can afford (Berthon, et al., 2009). Louis Vuitton, as mentioned, is one of the few luxury companies that have successfully established a global presence, but this comes at a huge price. The challenge to globalize has posed a problem not specific to luxury goods, but more damaging to it – that of piracy and counterfeiting. For luxury goods that do subcontract segments of its production process in other countries, there is difficult in securing the equity rights over the brand, proprietary symbols and trademark that constitute the rationale for buying the product. In many cases the very subcontractors are themselves the perpetrators, because they have access to the original processes that make their outputs nearly indistinguishable from the original. While this dilemma likewise disadvantages non-luxury goods by taking away market demand, and therefore revenues, from legitimate suppliers, it is doubly problematic for luxury brands because more than revenues, the equity of the brand name is itself destroyed or diminished. In what seems a futile effort to stamp out the rampant counterfeiting particularly in countries with weak regulatory control mechanisms against commercial piracy, Louis Vuitton filed in 2004 alone some 13.000 legal actions worldwide, conducted more than 6,000 raids, and secured more than 950 arrests as well as the seizure of fake printing cylinders that replicated its symbol and trade mark (Louis Vuitton, n.d.). In December 2005, LVMH scored a small but significant victory when a Beijing court ordered the Xiushui Housen Clothing Market, which operated the popular shopping pavilion, the Silk Market, to pay LVMH, Burberry, Chanel, Gucci, and Prada some US$14,000 in damages for selling counterfeit products bearing these brand names (Marinovich, 2006). While the monetary award may be small, it was won in the jurisdiction of a country that is counted among one of the world’s centers for commercial piracy, and against the Silk Street Market which is Beijing’s most notorious counterfeit-goods shopping mall (USTR, 2011). Strategy paradoxes experienced in Louis Vuitton To this day, Louis Vuitton has chosen to capitalize on its long and distinguished history and strategically anchors its contemporary image as the quintessential purveyor of luxury of European monarchs and other royalty. This in itself is a paradox of sorts, seeking to simultaneously juxtapose an aura of elitist aristocracy in the era of egalitarian diversification. What is remarkable is that Louis Vuitton has been able to thrive in the light of these divergent contexts, and has succeeded, in a way that only a few others have, in establishing this duality as its competitive advantage. The Louis Vuitton product, as with other luxury products, is especially desirable because of its price. Conventional economics theory states that the lower the price of a product, the higher its demand. Not so for the luxury good: the price may be exorbitantly high, even taking into consideration the craftsmanship and construction of the product, but for the privilege of being associated with the brand name. Thus, the more irrationally (by conventional standard) expensive the product, the more desirable it is to the market it targets. This is one paradox grounded in economics, because cost efficiency and price competitiveness in the conventional sense are anathema become irrelevant. The paradoxical implications upon the company are apparent: the company must, as a business, maximize its revenues, but it should do so by keeping its sales volume tightly controlled and limited to a select market (Kapferer & Bastien, 2008). The luxury brand should never be discounted or marked down, never be seen to chase the market to the lower economic strata; examples of these are Pierre Cardin and Packard. On the other hand, inaccessibility and extreme exclusivity renders a brand unprofitable for failure to grow; examples of these are Bristol Cars and Wildsmith the Shoemaker (Berthon et al., 2009:54). Another qualification is that the modern luxury brands must be globally accessible but not widely available. The strategy demands that the brands may be readily purchased anywhere in the world in selected outlets, also often company branded, or on high-end websites. The tension in this case is between “exclusivity and ubiquity” (Berthon et al., 2009:54). The successful luxury brand cannot be too common to be possessed by all, but sufficiently popular as to be recognizable as a high-end luxury item, even a rarity (Kapferer & Bastien, 2008). Aside from just the marketing end, the problems posed by globalization also have implications on the supply end. Most global industries find an advantage in subcontracting portions of its production process, for which it realizes substantial cost efficiencies. This is inconsistent with the idea of country concept branding for luxury products. The Louis Vuitton brand is distinctly valued for being a French brand and implying it was made by skilled craftsmen in France unmatched anywhere in the world, much in the same was some Italian brands are valued for being “made in Italy”. Therefore, the idea that in other countries, in the Third World no less, distinctive parts of the product are created by lesser, non-traditional craftsmen tends to lessen the symbolic value of the brand. Key strategic decisions the company will have to make Based on the preceding explanation, it is evident that many paradoxes exist in the strategic operation of Louis Vuitton. For purposes of establishing a focus of discussion, three key strategic decisions shall be specified for resolution: 1. How to maintain globalization effort without diluting brand equity and diminishing luxury image 2. How to maintain revenues and profits in a prolonged period of economic crisis 3. How to address piracy and counterfeiting while taking advantage of production efficiencies created by globalization Pursuing continued globalization without diluting the luxury image. The principal issue facing Louis Vuitton is the reconciliation of its globalization effort with the preservation of the luxury image of its brand names. This may be viewed through Weber’s paradox of materialism, where material objects are valued according to ascribed attributes. As luxury objects, the particular allure of the product lies in the association of the brand name with wealth and exclusivity. Therefore, in the course of globalization this aspect should be maintained and defended. The dilemma may be addressed through De Wit and Meyer’s paradox of logic and creativity. The payment of expensive sale prices of luxury goods are not logically justified by the construction or utility of the thing, though these be of high quality, thus the creativity in the design, manufacture and marketing of these goods must be preserved. Subcontracting and outsourcing should not be undertaken for distinctive and non-generic components that are of proprietary nature (for instance, the embossing of the Louis Vuitton symbol on the leather material of the bags and luggage). Also, pursuant to the paradox of leveraging resources and market adaptation, it may not be denied that Louis Vuitton’s brand name requires to be marketed to enhance the brand recognition and increase the ascribed value of the luxury item (i.e. the materialism paradox). The brand name must therefore be adapted to the market, while keeping the luxury product exclusive. With a little creativity, the brand name may be popularized by attaching them on items that do not constitute the firm’s luxury products. Tasteful advertising also enhances the distinctive appeal of the brand name without trivializing the product. Maintaining revenues and profits in a prolonged period of economic crisis. In the historical background discussion of the LVMH Group, it is apparent that the businesses have been run in a financially conservative manner throughout the height of the 2008 financial crisis, by avoiding unnecessary risks and therefore keeping the Group in the black. There is speculation, however, that the economic recession may not be over yet, and the prospect of a prolonged recession is understandably a threat to the continued profitability of any luxury business, particularly when the crisis hits the higher income bracket. In such a case, the typical strategy of a regular retail firm would be for it to lower the prices of its goods and content itself with narrower margins, thereby engaging its competitors in a price war. For luxury items, however, chasing down the market by lowering prices would destroy the luxury image of the brand which justified the high margins associated with it. During times of crisis when conspicuous consumption may seem anathema to the suffering of a significant segment of society, a luxury firm should not be seen as elitist even as it maintains the exclusivity of its products. In De Wit and Meyer’s paradox of profitability and responsibility, the firm is seen as a corporate citizen that performs its corporate responsibility while maintaining its profitability. This context may be combined with Weber’s paradox of asceticism, where other worldly objectives (such as philanthropy and altruism) may be pursued through worldly endeavors (such as the creation of profit). The key for Louis Vuitton would be to maintain its attractiveness to its market segment (Class AB) possibly by earmarking a portion of its profits for corporate responsibility projects, and publicly reporting its efforts towards this end. Such an undertaking would likewise comply with the corporate governance requisites of many developed countries, while at the same time enhancing the image of its customers who will be seen to purchase Louis Vuitton items not only to project affluence, but also to contribute to the general welfare via the social projects of the company. More than just image building, Louis Vuitton may indeed contribute to the faster recovery of the economy by giving something back to the community, not only during crisis but also in the developing countries where it has a market presence. Addressing piracy and counterfeiting while taking advantage of production efficiencies created by globalization. Probably the most daunting task facing all branded enterprises is the problem of counterfeiting and piracy. It is true that bilateral and multilateral agreements have specified standards for member countries to abide by, but in the enforcement there is a huge gap where police action is required. This falls foursquare into Beaudan’s implementation paradox, that states that the best laid strategies, though flawless on paper, will only be as good as they could be implemented. IPR theft proceeds unimpeded in many developing countries, giving substance to Weber’s paradox of formal rationality. National laws have been created that comply with the stipulated conditions in the international treaties and agreements, except that the substantive reality is that in many places, these laws are just unenforceable, often because of poor law enforcement institutions. The cross country aspect implicates Chen’s paradoxical integration. Legal enforcement in the underdeveloped countries is not pursued in the same way as it is in the developed West, thus a different way other than coercive should be employed. The Chinese philosophy of the Middle Way and combining the integrative and encompassing approaches may involve the linking of benefits (such as enhanced trade) and assistance (such as bilateral arrangements involving training and tactical cooperation) may enhance the implementation aspect of the strategies to combat piracy. Such an approach would likewise be consistent with De Wit and Meyer’s revolutionary and evolutionary change processes. Revolutionary or sudden change (i.e. negotiated agreements and treaties) should be complemented with evolutionary or gradual, institutional change (such as programs of cooperation and collaboration that provides mutual benefits for participating countries). Evolutionary change involves a change of attitude and values; it takes longer, but produces more permanent results. In the overall organizational structure, Khanna and Palepu’s argument on consolidating into groups appears to remain effective for Louis Vuitton. The consolidation of LVMH businesses into a single entity extant since 1987 has created strategic competitive advantages for the business, especially since luxury goods target a specific clientele who may prove to be receptive to the various brands under its umbrella. There is little wonder that the LVMH Group has successfully penetrated the different market niches that apply to their exclusive class of customers. Conclusion: Implementation challenges in the global market The proposed strategies to address the strategic concerns are not free of complication. Mintzberg’s paradox of deliberateness and emergence will always be of vital concern to a business like Louis Vuitton. “Exclusivity versus Uniqueness” will continue to be a requisite for this luxury Group, where the exclusivity of the source must be protected; in this case, the “source” is the principal line of products for which the LVMH brands are known. The brand is to be leveraged so that it appears on items that are diverse and do not compete with the source. There is always the risk, however, that negative associations of the brand name with unintended elements may create adverse emergent situation. One can hardly forget the fiasco of Nike being associated with child labour and sweatshops in Asia, which caused the product brand serious damage. In pursuing their objectives, Raynor urges businesses to cultivate the capability to pursue different strategies and to easily switch from one to the other in response to the resolution of key uncertainties in the environment. He suggests that CEOs should focus their attention more on managing uncertainties rather than achieving results. This is thoroughly applicable to Louis Vuitton, the extension of which covers 60 high-profile and well-renowned brands, and market participation through its 2,400 specialty stores internationally. The very presence in varied regions and social environments necessitate the creation of different strategies to address the situations in these different localities. A solution that incorporate versatility and flexibility is recommended by Johnson & Johnson (Daft, 2009, p. 72), based on its experience as a global brand. It involves: 1. Anticipation of the future and formulation of strategic options. This requires building scenarios, then formulating long-range strategic options to deal with each scenario. 2. Deciding on strategic actions and managing the chosen options. As the future unfolds, managers may select the option that best addresses the situation. Senior managers create and identify the options to be followed, line managers implement them. Finally, in recognition of the firm’s human resources as the most vital agent of strategy implementation, Beaudan (2001) articulates the following policies that may well be applied in the Louis Vuitton case: 1. When formulating strategy, permit voices from all levels of the organization to be heard. LVMH is a broad and deep organization, and the best ideas may emanate from within. 2. Engage people’s intellect by clarifying what the strategy is about. Employee engagement encourages loyalty and retention while keeping intact vital company knowledge, especially with regard to its luxury brands. 3. Strategy must used to generate dialogue about important issues. People who are open with what they think will be more capable of addressing changes in the business environment and making adjustments to strategy as emergent issues arise. Dialogue reduces the uncertainties, and empowered workers more effectively respond to unforeseen challenges to strategic plans. WORDCOUNT = 4,000 excluding title, references and appendices References Beaudan, E (2001) “The failure of strategy.” Ivey Business Journal, Jan/Feb 2001, Vol. 65 Issue 3, p. 64 Berthon, P; Pitt, L; Parent, M; & Berthon, J-P (2009) “Aesthetics and Ephemerality: Observing and Preserving the Luxury Brand,” California Management Review, 52(1): 45-66, Fall Birchfield, R (2007) “The Strategy Paradox.” New Zealand Management, Aug 2007, Vol. 54 Issue 7, p. 96 Chen, M-J (2002) “Transcending Paradox: The Chinese 'Middle Way' Perspective.” Asia Pacific Journal of Management, Aug 2002, Vol. 19 Issue 2/3, p179 Crisan, G C; Nechita, E; & Talmaciu, M (2007) “How often does the Parrondo Effect Appear?” Fluctuation & Noise Letters, Jun 2007, Vol. 7 Issue 2, pC19-C25 Daft, R L (2009) Organization Theory and Design. Mason, OH: South Western Cengage Learning. 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Accessed 28 January 2011 from http://www.brandchannel.com/features_profile.asp?pr_id=310 Moyer, D 2008 “Strategy Paradox.” Harvard Business Review, Jun 2008, Vol. 86 Issue 6, p144-144 Office of the United States Trade Representative (USTR) (2011), Section III. Notorious Markets. Accessed 28 January 2011 from http://www.ustr.gov/sites/default/files/Notorious%20Markets.pdf Pettigrew, A.; Thomas, H.; & Whittington, R. 2002 Handbook of Strategy and Management. London: SAGE Publications Ltd. Storey, J & Salaman, G (2010) Managerial Dilemmas: Exploiting Paradox for Strategic Leadership. New York, NY: John Wiley & Sons, Inc. Vieira da Cunha, J; Clegg, S.R.; & Pina e Cunha, M.(2002) “Management, paradox, and permanent dialectics,” in Clegg, S R (ed), Management and Organization Paradoxes, Amsterdam: John Benjamin B.V. Appendix LVMH Group Organizational Chart as of January 2010 Continued on next page Continued from preceding page Read More